Can we afford national disability insurance?

Can we afford the proposed national disability insurance scheme? According to documents released by the Treasury, wage rises for community workers have increased the additional annual running cost of the fully fledged scheme by 15 per cent, to $7.5 billion at 2012 prices.

With Treasury secretary
Martin Parkinson
warning about the revenue shortage now gripping the budget, it may not be long before politicians start talking about phasing the scheme in “as budgetary conditions permit".

But perhaps we are focusing on the wrong question. Obviously a country that earns $1400 billion a year in national income can afford $7.5 billion a year for a disability insurance scheme.

The most important question is not the cost to the budget, but the cost – and the benefits – to the economy. According to the Productivity Commission, the net economic cost of disabilities will fall with a properly constructed national insurance scheme.

That is not very surprising. The cost to the economy (as opposed to the budget) of providing the insurance scheme is nothing like $7.5 billion a year. That money is a transfer between members of the economy, and it is not a cost to the economy any more than a transfer of money between members of a household is a cost to that household.

The economic cost of taking $7.5 billion a year from taxpayers to spend on the disabled is the “deadweight" loss to the economy incurred as taxpayers work and invest less.

That was estimated by the commission at about $1.6 billion on the assumption that the scheme would be funded from income tax. (And it would be true even if other spending were cut to pay for the scheme: income tax would still have to be $7.5 billion higher with the scheme than without it.)

On the commission’s reckoning, the disability insurance, therefore, would have to generate benefits averaging $3800 for each of the 410,000 people funded by the scheme in order to offset the deadweight loss and pass a cost-benefit test, which it believes is “strongly probable".

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Its calculation is based partly on an assumption that the money paid out by the scheme will be worth more to the beneficiaries than to the taxpayers who financed it. That seems reasonable.

People with disabilities and their carers are among the most disadvantaged in Australia. The money will make only a small difference to most taxpayers, but a big difference to the recipients.

However, the estimate is also based on the expectation of significant efficiency gains in the disability services sector.

The commission cites a study of aged care that found efficiency could be improved by about 17 per cent. Aged care, it says, shares common features with some disability services.

Introducing a national insurance scheme and reforming the disability pension would also significantly increase employment among disabled people.

If Australia lifted its rate of employment among the disabled to the average for the rich developed economies, another 100,000 workers would be added to the workforce by 2050. That, the commission estimates, would increase real gross domestic product in that year by about 0.2 per cent, or about $8 billion.

If the federal government agreed to fully fund the disability insurance scheme, the states could use the money they saved to cut their least efficient taxes. The economic gain from the improvement in the tax mix is estimated by the commission to be about $500 million a year.

Of course, the federal and state governments don’t need a new disability support scheme to reform the national tax mix. A similar point also can be made about the estimated economic benefits of redistributing income to poor households. So some economists, therefore, will protest that the gains attributed to the disability reforms are exaggerated.

But even if we accept that claim, the real cost of providing more efficient, pro-employment support for the disabled is still nothing like the cost estimates that now confront our politicians.

The problem is not the cost to the economy of the disability insurance scheme, which is small or even negative, but the reluctance of the politicians to make room for it in their economically inefficient federal and state budgets.

Australians are not highly taxed by rich-country standards, but our governments are too dependent on economically damaging taxes. And too much money is wasted on programs such as the submarines and subsidies to manufacturers, none of which have been subjected to the kind of rigorous, independent analysis applied to the disability insurance scheme.

Had there been more rigour in assessing public spending, disability insurance would have been in place years ago.